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Huge deposits of crude oil and natural gas off Sakhalin Island could bring billions to foreign investors — and the Russians who work with them. But residents of the remote island are hoping they have something to gain from the black gold rush.

For 50 years, scientists and companies around the world have known about the huge crude oil and natural gas deposits lying just off the coast of Sakhalin Island.

But the Soviet government lacked the money to drill it, and the regime’s laws made international projects impossible.

Now, two colossal projects on the Sakhalin shelf, known as Sakhalin I and Sakhalin II, are poised to begin within the next few years. Thanks to cooperative agreements between Russia and the oil companies, the projects have already brought millions of dollars and scores of foreigners to the island and promise benefits for the entire Russian Far East.

“We’ll gain employment on Sakhalin, and private enterprise here will grow,” said Oleg Konyukh, head of the Sakhalin Oblast’s Department of Economics. “Our manufacturers will get more business, and the entire Russian Far East will profit from the shelf development.”

Sakhalin needs whatever help it can get right now. Like much of Russia, the island faces rising unemployment. Its doctors, teachers and coal miners take turns in hunger strikes, desperate for months of back pay. The primitive train system takes passengers only halfway up the island. In addition, Sakhalin’s isolation (and stagnant manufacturing) means consumer goods are up to 50 percent more expensive than in Vladivostok.

The oil companies won’t be able to control prices in the stores or pay state employees’ salaries, but the local administration has proof the projects will help local residents.

For the first time in Russia, the Sakhalin oblast government and the Russian Federation have signed special agreements that assure profits for both the companies and Russians, said Frank Duffield, president of Sakhalin Energy, the consortium developing Sakhalin II.

The production-sharing agreements obligate the operating companies to pay royalties to Russia for using its resources. In this case, Russia will also receive bonuses after each stage of the project’s development has been completed. According to a recent agreement, the Sakhalin administration and the federal government will divide these funds, with the larger share going to the island.

And after pumping begins, the oil companies will pay the Sakhalin administration $100 million over the next five years for improvements to its railroads, highways and agriculture. In return, the government guarantees the main investing partners access to the oil for marketing, transport and sale.

But the agreements offer further benefits, not just for Sakhalin but for the entire Russian Far East: an agreement by the oil companies to give up to 70 percent of contracts to Russian or joint-venture Russian companies.

At a recent conference in Yuzhno-Sakhalinsk, Russian business people gathered to hear contracting opportunities with the oil consortiums that are leading Sakhalin I and II. The presenters stressed that Russian firms need to offer competitive pricing and high quality, on-time service to win the contracts. The consortiums want Russian participation on a host of project details, from ecological geologists to housing contractors for employee residences on the island. And to give information on financing the projects, several for-profit and non-profit funding entities attended the event.

Sakhalin I is led by Exxon, in partnership with the Japanese company Sedeko and the recently-privatized Russian enterprises SakhMorNefteGas and RosNeft. Sakhalin Energy is carrying out Sakhalin II and consists of Marathon, Royal Dutch Shell, McDermott, Mitsubishi and Mitsui.

Accustomed to world-class quality, the oil companies say they’re facing a new challenge in guiding Russian businesses to work in competition with Western firms. Mostly, they say, they hope the Russian companies will form joint ventures; this will give them access to the experience and financing that would be hard to get on their own.

Without Western partners, Russian firms will have a hard time getting financing, says Ronald Scherpenhuijsen Rom, senior finance manager at ING Bank in Tokyo and a coference attendee. He says Far East Russian companies’ inexperience in the world market makes them an unknown.

“It’s a chicken and egg thing. Russian companies need financing to get approval for their projects, but we can’t finance them until we know they’ve won the [contract],” since they often have short track records, says Rom.

And maybe it’s from the disillusionment of communism’s fall, but many Sakhalin businessmen and residents are cautious about the shelf venture.

Said Victor Kanarsky, founder of a Russian fishing company association on Sakhalin, “I don’t think it will necessarily bring direct profit to Sakhalin. Yes, we will get some jobs. But if you think about it, $100 million is pocket change. One ship costs $16 million; what can we really accomplish with that money?” But Valery Koltsov, manager of the Sakhincenter, Yuzhno-Sakhalinsk’s enormous business building, is unequivocal about the benefits.

“We’re the barometer of business,” says Koltsov. “And we’re doing so well that we don’t have to advertise” for occupants.

Mostly, though, Sakhalin residents are waiting to see if promises made actually come true. The Sakhalin administration, for example, promises that revenues from the project will be used to improve the island’s inadequate infrastructure, but many fear the funds will end up in a few politicians’ pockets.

“International firms should worry about whether the money is going where it’s supposed to,” says Vladimir Sorochan, editor of Sovetsky Sakhalin, the island’s main newspaper. “It’s important for everyone to feel a benefit from the shelf project — not just a few authorities.”

Right now, there is reason for cautiousness.

Boris Yeltsin signed the production sharing agreements last year, but the Duma still hasn’t beefed up the weak legislation that the consortiums need in order to go ahead with the projects.

“If the work on the projects doesn’t continue,” says Konyukh, “we’ll lose our investment potential.” For Sakhalin, the agreement with Moscow to share the project revenue was a coup; Sakhalin will take 60 percent while Moscow will get 40. But representatives of both consortiums say they are waiting for the crucial supporting legislation to come through.

One group that is proving to be vocal about the development is the endangered indigenous people who live in the island’s northern territory.

They say that the oil companies have not fully researched the possible environmental damage from the drilling and pipelines, and they want compensation for the activity that will occur on their land. Nadyezhda Laygy, representative of ethnic minorities at the governor’s office, said the oblast administration in 1995 signed an agreement to provide 10-15 percent of the production sharing agreement bonuses received from the consortiums. They are also demanding more investigation of the development’s effects on their habitat.

Michael Allen, Sakhalin Energy’s community relations representative, says his company still hasn’t discovered the possible effects of laying a planned pipeline from the north of the island all the way to Yuzhno-Sakhalinsk. And he says a study is needed on the gray whale, which summers in the Sea of Okhotsk. But phase one of the project involved a full environmental assessment.

Representatives of both consortiums speak openly about the environmental dangers of shelf drilling. One of the most challenging areas of the world, the region is often rocked by seismic activity, and winter brings huge, moving ice floes. They hope to avoid disaster by designing special platforms and using experience gained in other seismic areas, like California.

Still, given the Exxon Valdez disaster — when a ship dumped 11 million tons of oil into Alaskan waters — there is little environmental activism at all on Sakhalin yet. A few individuals, such as Kanarsky, the fishing company representative, worry that the drilling will wipe out the fish population. But organized environmental groups, other than the island’s native Nivkhi, Ivkhi and Ilgi, have not made much noise. But perhaps people’s silence is simply due to the size of the planned development.

In 1996, Exxon Neftegas spent $60 million on seismic research and test drilling. This year, the budget is $180 million — and Larry Kennedy, Sakhalin operations manager, says oil won’t start pumping at least until the turn of the century. Once the crude starts flowing, he predicts these first fields alone will yield for 50 years.

Even affluent Sakhalin residents are wary right now, however. Olga Che, an accountant, and Irina Ogoleva, manager of a trading company, say legislation is too weak and too changeable to predict how the shelf project will go.

“The idea is interesting,” says Che. “But the [Federal] Duma isn’t helping — always changing the tax laws. So we’re all skeptics. Time will tell.”